InterGlobe Aviation (INDIGO) management’s renewed focus on driving higher load factor and market share through lowering yield, continued to reflect in its operating metrics in August, as the airline recorded second consecutive month of 40% y-o-y growth in volumes, supported by 530 bps higher load factor, and resulting in 456 bps gain in market share. We acknowledge strong improvement in IndiGo’s operating metrics post a weak Q1FY17, though await more clarity on yield to turn bullish. Maintain add.
Strong July performance repeated in August
IndiGo’s operating performance has continued to improve since June 2016, with August recording another strong jump of 40% y-o-y in its passenger volumes, much ahead of industry volumes growth of 24%. IndiGo’s market share, at 39.9% (+456 bps y-o-y), continued to improve strongly, at the cost of its major peers, i.e. Air India and Jet Airways, who have been missing out on strong demand in domestic aviation space due to limited capacity addition at their end. IndiGo’s substantial capacity addition (+31% y-o-y as per our estimates), was adequately deployed, leading to it recording a 530 bps higher load factor to 82% in the month. We note that IndiGo’s average load factor of 83% in July-August 2016 is the highest in the past three years for these months.
Near-term outlook remains challenging as yields converge
IndiGo management’s renewed focus on improving its load factor and market share, by matching the airfares offered by its competitors, is visible in its operating performance over the past two months. Our monthly airfares database suggests severe price-based competition continuing in September, implying that profitability for all major airlines will be under pressure in FY2017e, as their airfares converge. However, we continue to hold the view that yield will stabilise over the next 6-8 months as the strategy of discounted-airfares driven growth being pursued by a few airlines stops adding to their load factors and weak profitability of IndiGo’s peers forces them to price their tickets appropriately. Importantly, all airlines (except for SpiceJet) recorded a drop in load factor on a m-o-m basis, implying that incremental gains in load factor, at the cost of keeping fares low, have stopped accruing.
Awaiting yield to stabilise to revisit estimates
We acknowledge IndiGo’s strong and ahead-of-estimates performance in July-August, though we prefer to wait for the yield to stabilise before revising estimates. Maintain ADD with TP of R1,020. Recovery in yield, along with continued strong volumes growth, is the key near-term trigger for IndiGo’s stock price, in our view.